Capital Planning Update

Transcription

1 Capital Planning Update Iowa Bankers Association 2016 Annual Convention September 18-20, 2016 Des Moines, Iowa Robert Flowers Hunton & Williams LLP 1445 Ross Avenue, #3700 Dallas, Texas (214) Copyright All Rights Reserved

2 CAPITAL PLANNING The Capital Planning Process Preparing Strategic Plan Maintaining a Strategy to Ensure Capital Adequacy and Contingency Planning Identifying and Evaluating Risks Ensuring Integrity in the Internal Capital Planning Process and Capital Adequacy Assessments Setting and Assessing Capital Adequacy Goals That Relate to Strategic Plan and Risks 2

3 Capital Plans Problem Banks If regulatory examination shows bank in less than satisfactory condition, expect administrative action with Capital Plan requirement Requirements to achieve and maintain elevated levels of leverage and total capital If ratios fall below minimums, take steps to restore ratios Prepare and submit Capital Plan and after regulatory approval of Capital Plan, implement Capital Plan Show plans for immediate action to address capital situation shrink bank, sell branch, or raise identifiable capital Have quantifiable triggers to seek new capital, or take other action to improve ratios 3

4 Capital Plans Healthy Banks Bank regulators have communicated clear expectation for all banks, healthy or otherwise, to implement Capital Plans, especially for growing organizations Capital Plans should be prepared in ordinary course along with budget, Strategic Plan and Compliance Risk Management Plan Capital Plan should reflect condition and plans of the bank, current and projected economic conditions and should work in tandem with the bank s Strategic Plan and Compliance Risk Management Plan Risk tolerances and triggers for additional capital or other action No just-intime capital 4

5 Capital Plans Purposes Fuel in the tank Identify timing of capital needs to avoid just in time capital Provides management with reference points for capital alternatives and sources of capital Capital Plans are now being required of healthy banks as well as problem institutions 5

6 Capital Plans Components of the Capital Plan Background on bank/bhc Tolerances and triggers Capital alternatives (sources?) Consider BHC needs as well as bank needs Three-year to five-year projections Changes in business strategy or corporate structure One size does not fit all consider: Size of institution Complexity of the institution Risk profile of institution 6

7 Capital Plans Managing to the Buffer Zones Capital Ratios Phase-in Schedule January Minimum Common Equity Tier 1 % Capital Conservation Buffer % N/A Common Equity Tier 1 with Capital Conservation Buffer % Minimum Tier 1 Capital % Minimum Tier 1 Capital with Capital Conservation Buffer % N/A Minimum Total Capital % Minimum Total Capital with Capital Conservation Buffer %

8 Capital Plans Managing to the Buffer Zones Prompt Corrective Action (effective January 1, 2015) Prompt Corrective Action Categories and Ratios Tier 1 Leverage % Common Equity Tier 1 RBC % Tier 1 RBC % Total RBC % Well Capitalized Adequately Capitalized Undercapitalized < 4.0 < 4.5 < 6.0 < 8.0 Significantly Undercapitalized < 3.0 < 3.0 < 4.0 < 6.0 Critically Undercapitalized Tangible Equity/Total Assets 2% 8

9 Capital Plans Managing to the Buffer Zones Well-Capitalized Ratios vs. Buffer Zone Ratios Common Equity Tier 1 RBC % Tier 1 RBC % Total RBC % Well-Capitalized Ratios 6.5% 8.0% 10.0% Buffer Zone Ratios 7.0% 8.5% 10.5% BASEL III Minimum Ratios 4.5% 6.0% 8.0% Size of Buffer 2.0% 2.0% 2.0% 9

10 Capital Plans Managing to the Buffer Zones Maximum Payout Amount as % of Eligible Retained Income Size of Buffer No Buffer Limit Greater than 2.5% 60% (40% cut) 40% (60% cut) 20% (80% cut) 0% (100% cut) > 1.875% to 2.500% > 1.250% to 1.875% > 0.625% to 1.250% 0.625% 10

11 Capital Plans Managing to the Buffer Zones Discretionary Bonuses An executive officer is defined as a person who holds the title or, without regard to title, salary, or compensation, performs the function of one or more of the following positions: President Chief Executive Officer Chief Legal Officer Chief Lending Officer Chief Risk Officer Head of a major business line Other management staff that the board of directors of the banking organization deems to have equivalent responsibility 11

12 Capital Plans BHC versus Bank Capital Bank Capital Requirements Higher ratios Limited Tier 2 BHC Capital Requirements Lower leverage ratio requirements; all other ratios are risk-based BHC s with less than $1 billion in total assets are generally not subject to Federal Reserve consolidated capital guidelines Proceeds of debt or other Tier 2 capital raised at BHC level can be injected into the bank as common equity capital 12

13 Capital Planning Law Change Changes to the Small Bank Holding Company Policy Statement The use of debt financing to provide capital expanded greatly on December 11, 2014 for a large group of financial institution holding companies A small bank holding company is now a bank holding company with <$1 billion in consolidated assets Must be mindful of debt-to-equity ratio The 2014 changes to the Policy Statement give banks with $500 million to $1 billion in total assets greater ability to finance growth and acquisitions These institutions can issue holding company level debt with the proceeds injected into the subsidiary bank. These such funds will be common equity enhancing the numerator on all capital ratios 13

14 Capital Plans Sample Sources of Capital Subordinated Debt Unsecured Ranking Senior to stock Senior to TRUPs Junior to senior indebtedness such as bank-stock loans Duration Rate Call features Conversion features Payment-in-kind features 14

15 Capital Plans Sample Sources of Capital Advantages of Subordinated Debt Tier 2 Capital at BHC level Unsecured No financial covenants No guarantees Tier 1 Capital at bank level Interest payments are deductible (unlike dividends) Non-dilutive to shareholders (absent conversion or PIK features) Preferred by retail investors (coupon clippers) 15

16 Capital Plans Sample Sources of Capital Disadvantages of Subordinated Debt Tier 2 Capital at BHC level requires minimum 5-year call right Amount treated as Tier 2 Capital decreases by 20% per year during last five years Typically requires higher interest rates for retail investors Impact of interest and principal payments on cash flow Debt-to-equity ratio concerns at BHC level for BHCs with <$1 billion in total assets 16

17 Capital Plans Sample Sources of Capital Pros and Cons of Debt Alternatives Bank Stock Loan Sub-debt Pros: Cheaper coupon Flexible prepayments Cons: Principal repayment Collateral Covenants Guarantees? Pros: Capital treatment Interest only No collateral No financial covenants Cons: Higher coupon 5-year lock-out 17

18 Capital Plans Sample Sources of Capital ISSUES TO CONSIDER IN A CAPITAL OFFERING Nature of securities offered Corporate Governance Issues Nature of purchasers Exemptions Pricing Minimum investment Sweeteners (warrants, convertibility) Offering period Placement agent Supplements 18

19 Capital Plans Alternative Sources of Capital KSOPs Overview of KSOP Transaction Create ESOP/KSOP Fund ESOP/KSOP One-time election right Rollover IRAs Match or discretionary contribution by BHC or Bank Leveraged ESOPs 19

20 Capital Plans Alternative Sources of Capital KSOPs Existing 401(k) Plan Amendment and Restatement to add ESOP Feature New KSOP (401(k) Plan with ESOP Feature 20

21 Capital Plans Alternative Sources of Capital KSOPs BHC ESOP Loan Bank Plan Contributions New KSOP (401(k) Plan with ESOP Feature 401(k) Participants Participant Election Right 21

22 Capital Plans Alternative Sources of Capital KSOPs KSOP Considerations Plan design Appraisal requirements Benefits of a Sub S ESOP ERISA issues Fiduciary duties Inside/outside trustees Third-party administrators Bank Holding Company Act issues 22

23 Capital Plans Warren Buffet s 5 Uses of Capital Support growth consistent with Strategic Plan Increase dividend/distribution Provide shareholder/option holder liquidity Refinance/replace existing debt/equity (SBLF, CPP, lines of credit) Acquisitions (whole bank and branches) 23

24 Uses of Excess Capital Stock Repurchase/Shareholder Liquidity Tender offers Typical structure Bifurcated tender offers Installment sale Test the Waters letters Basic tender offer rules 20 days minimum Extensions 24

25 Uses of Excess Capital Holding Company Lending Loans to directors, officers, and/or employee Option/Warrant Exercise Regulation O ESOP Lending Shareholder liquidity Address Lending Limit Issues Considerations Fed approval/notice Policies/procedures Management/staffing 25

26 Copyright 2015 Questions?